US Sanctions On Iran Likely To Hit Credit Rating, Could Benefit Saudi Arabia

The US decision to withdraw from the current nuclear deal with Iran is a new factor in the complex political re-alignment occurring across the Middle East.

Overall US policy in the region increasingly favours Israel, indirectly boosting the electoral performance of populist Shia candidates in Lebanon and Iraq.

The decision has also highlighted the risk of increased tension between Saudi Arabia and Iran as they vie for regional leadership.

It has been one factor behind the recent surge in the oil price – a welcome boost for Saudi Arabia ahead of the enormous ($2trn) Saudi Aramco flotation planned for later this year.

Saudi Arabia has a CBC* of a, generally in line with or slightly below the main rating agencies. If oil price rises are sustained, there will be a positive impact on Saudi reserve values.

Iran’s nuclear program has been a perennial problem for Israel, but Iranian military involvement in Syria is the more immediate concern and source of direct conflict. One view is that Iran needs a friendly regime in Syria to support its projected (and Russian-backed) Iran-Iraq-Syria-Lebanon gas pipeline, and that this is the main reason for the increased Iranian presence. On this view, the proposed Iranian pipeline is polarising the region along a new axis, pushing Saudi Arabia closer to Israel and Turkey.

Iran does not have a traditional credit agency rating, but bank-sourced data shows a historically stable CBC* of b+. The Iranian economy will inevitably suffer from renewed US sanctions, so this is likely to deteriorate. This strengthens Iran’s motivation for the gas pipeline which is intended to supply Europe via the Lebanon. If it continues to pursue that route, there is a risk of further conflict with its regional rivals.

*Credit Benchmark Consensus (“CBC”): this is a 21-category alphanumeric scale based on bank-sourced one-year probability of default estimates. It is similar to the scale used by the main credit rating agencies, so that a CBC of bbb is approximately equivalent to BBB reported by S&P and Fitch, and Baa2 reported by Moody’s

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